What is the difference between cash basis and accrual basis accounting, and when would you use each method?

Cash basis accounting records revenue and expenses when they are actually received or paid, while accrual basis accounting records them when they are incurred, regardless of when the money actually changes hands.

When to use each method:

Cash Basis Accounting: This method is simple and straightforward, making it ideal for small businesses or individuals with straightforward finances. It is also suitable when immediate cash flow is a priority, as it provides a clear picture of actual cash available at any given time.

Accrual Basis Accounting: This method conforms to Generally Accepted Accounting Principles (GAAP) and provides a more accurate long-term view of the financial health of a business. It is recommended for larger companies with complex financial transactions and a significant time gap between the transaction and the actual cash flow.